May 19, 2006

New Mexican CAT bond would be triggered by big quake

The Mexican government is the latest to arrange securitization of hazard risk with a parametric catastrophe bond that would respond to big quakes in specified regions of Mexico. Mexico Is Offering Bonds to Cover a Major Quake - New York Times (May 13, 2006).

The General Accountability Office has examined the role of "CAT bonds" in natural disaster and terror risks in several studies. See, e.g.:

  • "Catastrophe Insurance Risks : The Role of Risk-Linked Securities and Factors Affecting Their Use" GAO-02-941 (2002);
  • CATASTROPHE INSURANCE RISKS: Status of Efforts to Securitize Natural Catastrophe and Terrorism Risk GAO-03-1033 (2003)
  • CATASTROPHE RISK: U.S. and European Approaches to Insure Natural Catastrophe and Terrorism Risks - GAO-05-199 (2005)

    Also, major insurance brokers track the market for CAT bonds; Guy Carpenter has an annual report online for year-end 2005 that notes the impact of Katrina and other major storms, which triggered the first recorded total loss on a CAT bond and some "capacity tightening" amidst increasing interest and standardization. Standardization and increased usage could reduce the expense of setting up and placing CAT bonds, which is regarded as significantly higher than reinsurance. The Guy Carpenter report includes some excellent charts showing nine years of history of the CAT bond market and its response to the overall insurance cycle as a source of alternative capacity. The Catastrophe Bond Market at Year-End 2005: Ripple Effects from Record Storms" (Guy Carpenter 2006).

    Thanks to RiskProf for the link to the story about the Mexican securitization. RiskProf : Mexican CAT (May 16, 2006)

    DougSimpson.com/blog

    Posted by dougsimpson at May 19, 2006 08:10 AM